Want More Money in Retirement? Spend Less

I find it depressing to look at the balances in my retirement savings plans, as I did the other day. For all the years of socking away money in my nest egg, there doesn't seem to be much to show for it.

CALCULATOR: Do You Have Enough to Retire?

But I'm in good company. The median balance in 401(k)s and IRAs for households approaching retirement is $120,000, according to an analysis by Alicia Munnell, director of the Center for Retirement Research at Boston College, of the Federal Reserve's recently released 2010 Survey of Consumer Finances. That's roughly the same amount as in 2007, and it would provide a mere $575 in monthly income, assuming a couple purchase a joint-and-survivor annuity.

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Retirement savers probably won't have much to cheer about anytime soon, not with economic growth decelerating in the U.S. and Europe mired in a seemingly endless debt crisis. Little wonder boomers are realizing that they need to focus on practical ways to earn a paycheck well into the traditional retirement years. Even part-time earnings will allow them to postpone tapping savings and let the money compound longer.

Still, I think the spending side of the retirement equation, a critical part of any savvy retirement plan, gets short shrift. With the day of retirement reckoning not all that far off, fiftysomethings need to realistically review their spending habits.

The financial reward of spending less is striking. Steven Sass, associate director at the Center for Retirement Research at Boston College, offers this example: Say you're 55 years old, and you plan on retiring in ten years. If you save an extra $1,000 a year, you'll have $10,000 plus investment earnings(in today's dollars). So, if your savings earned 4% above inflation -- you'd have about $12,500 (in today's dollars) at retirement. You could then withdraw about $500 a year in retirement, assuming you choose to spend 4% a year above inflation.

Here's the thing: The real return from this strategy comes from cutting spending to enable the extra savings. When you retire, you'll have actually improved your household finances by $1,500 a year: $1,000 in additional accumulated savings plus $500 in income. "As you approach retirement, and it's clearly too late to significantly add to your retirement savings by saving more, moving to a more sustainable standard of living has a much greater effect," says Sass. "The two effects of saving more and spending less could significantly improve your finances."

An emphasis on greater thrift doesn't have to mean living cheaply -- far from it. Instead, thrift or frugality should push us to match our money with our values. In History of the Thrift Movement in America, a 1920 book by Simon William Straus, Straus argues that thrift includes both saving and spending wisely.

"It is the thrift that recognizes the that finer things of life must be encouraged," he writes. "The skilled workman, the artist, the musician, the landscape gardener, the designer of beautiful furniture, the members of the professions -- all those, in fact, who, through the devotion of their abilities, contribute to the real betterment of mankind, must be given support through our judicious expenditures."

I like the concept of "judicious expenditures." When reviewing your spending, think about the things you cherish most. Then marry those insights with the practicalities of your personal finances.

Maybe you've equated living better with owning lots of stuff for far too long, even as you recognized in the back of your mind that what gives you joy is learning, creative activities, and shared experiences with family and friends. Retirement planning is an opportunity to bolster your finances and to translate those values into reality.

"When I am working with clients as they get older or near the end of life, they talk about the things they wish they had done," says Ross Levin, a certified financial planner and head of Accredited Investors Inc. "They talk about their regrets, and the regrets always focus on experiences. It's always something like, ‘I wish I had done more with the kids when they were younger.' It's never ‘I wish I had bought a Mercedes.'"

There are many ways to reduce spending without cutting into quality of life. Take eating and preparing food (favorite subjects of mine). Economists Mark Aguiar, of the Federal Reserve Bank of Boston, and Erik Hurst, at the University of Chicago's graduate school of business, tapped into a variety of data sources and found that food expenditures fall by roughly 17 percent when couples move into retirement.

Peanut-butter-and-jelly sandwiches for dinner and cereal for breakfast? Not so. Aguiar and Hurst concluded that spending less on food doesn't necessarily translate into a poorer diet. Retirees simply substitute healthier, cheaper home cooking for takeout and restaurant meals. There's no sacrifice here; in many households, cooking at home isn't a chore. It can be fun to emulate such celebrity chefs as grillmaster Bobby Flay and Ina Garten, the Barefoot Contessa.

Don't get me wrong. I'm not minimizing the financial strain that many preretirees say they're experiencing these days. It's just that we often neglect creative solutions that can help us overcome serious challenges. Meeting the challenge of paying for retirement with better spending decisions is no different.